The Wagner Daily


we often see on the day following a tight volatility contraction, the broad
market once again gave us a smooth and steady trending day yesterday, this time
to the upside. The 20-day moving averages we have been talking about did their
thing and provided support to each of the major indices that spurred a
broad-based rally. While we were not surprised to see the price retracement off
the lows, it was impressive that the broad market was able to rally way beyond
the 50% retracement level, which is where we had our stops for the DIA and ONEQ
swing shorts. Our expectation was for the market to bounce into its 38.2% or 50%
Fibonacci retracement level, run out of gas, and begin heading back down to test
the lows at the end of this week. Instead, the indices rallied sharply and
nearly closed at their prior 52-week highs. It was indeed an impressive
performance that shows the market still has some momentum. The S&P 500 and
Dow Jones Industrials both closed 1.1% higher yesterday, while the Nasdaq led
and closed 2.2% higher.

Although total market volume came in below its
50-day average yesterday, the breadth was extremely positive. Advancing volume
outpaced declining volume by a margin of nearly 9 to 1 in the Nasdaq and 5 to 1
in the NYSE! This tells us that, even though the buyers may not have been out in
full force, there were hardly any big sellers around. It’s been a long time
since we have seen a breadth reading so positive, but it will be interesting to
see if the breadth numbers are maintainable once “big money” steps back in the
market. Yesterday’s light overall volume readings would indicate a lack of
institutional participation on either side of the market.

The big
question on everyone’s collective minds now becomes whether or not the major
indices have enough juice to break the prior highs. If they do, it’s relatively
low-risk to initiate new long positions, as long as your stops are just below
the breakout levels. Remember that indexes and stocks at new highs usually go
higher simply due to the lack of overhead resistance. If there are no sellers
getting in the way, the index will go higher, regardless of how far it has
already run. So, keep a close eye on those prior highs in each of the
broad-based indices. Here are the prior highs (from November 7) to watch:

SPY – 106.72 (1062.39 for the S&P 500 Index)
DIA – 99.35 (9903
for the Dow Jones Industrials)
ONEQ – 79.68 (1992.27 for the Nasdaq

Until these levels are broken, we would not be too aggressive
in the broad market at current prices. But, as we said earlier, there is nothing
wrong with establishing new long positions if these highs are convincingly

Two industry sectors in particular caught our attention
yesterday. The CBOE Gold Index ($GOX.X), which has been in an uptrend since the
end of the year 2000, rallied with a vengeance yesterday and was the leading
sector in the entire broad market. The $GOX broke out of its base, rallied more
than 6%, and closed at a new 52-week high. In previous years, Gold stocks had a
tendency to trade contrary to the broad market and were viewed simply as a
“defensive” play. But, yesterday’s huge rally in Gold stocks once again
coincided with a sharp rally in the broad equities markets, which confirms this
is no longer the case. Commodities in general seem to be entering an extended
bull market and gold is going along for the ride. Below is a weekly chart of the
CBOE Gold Index ($GOX.X), which illustrates the sharp, but steady uptrend of

Unfortunately, there is not yet an ETF that specifically tracks the
price of Gold or Gold Stocks. However, there are plans to launch an ETF that
specifically invests in actual gold metal, under the ticker “GLD.” The launch of
this ETF has been delayed due in part to the government’s confusion over how to
treat a Gold ETF for tax purposes. Does it get treated as a stock (which pays
higher capital gains rates, or does it get treated as a commodity, which pays
lower taxes? Once it has passed regulation, we look forward to the release of
such an ETF, but in the interim, you may wish to create your own ETF. You can do
this by trading a small basket of several different gold stocks, which usually
move in tandem with the price of gold futures. If you have a broker who charges
you a penny or two per share, the commission cost of creating your own basket
would be minimal. Here are the ten gold stocks that comprise the CBOE Gold Index
($GOX): NEM, FCX, ABX, PDG, GFI, AEM, GLG, AU, ASL, MDG. Of these ten, the
individual stocks we commonly trade are NEM, ABX, PDG, and GFI. You may want to
take a look at these ten stocks because many of them broke out of strong bases
yesterday, and on HIGH VOLUME. While gold shares will probably consolidate or
correct today, many are positioned to go higher in the short-term due to the
lack of overhead resistance.

The second sector that raised our eyebrows
yesterday was the Pharmaceutical Index ($DRG.X). The drugs have been a laggard
to the strength of the broad market ever since mid-June, which was also the
approximate time that legislation was approved to allow the U.S. to import
cheaper drugs from Canada and overseas. While we typically focus on riding the
trend through buying the leading sectors and NOT the laggards, the laggards can
often present a low-risk opportunity on the long side IF you catch them when
they begin their reversal. Since we’re not into “bottom fishing,” which is when
we simply just guess when an index will find support, we use technical analysis
to look for reversals. Specifically, we look for double bottoms and a break
through a downtrend line or key moving average. In the case of the $DRG index,
yesterday’s performance met that criteria. Take a look at the daily chart of the
Pharmaceutical Index ($DRG) below:

On the chart above, notice how the index has formed a double bottom from
its October lows. By itself, this indicates a possible price stabilization.
However, there is no confirmation of a reversal UNTIL the index breaks the upper
channel resistance of its primary downtrend line, which is what happened
yesterday. Finally, notice how the index closed above both its 20 and 200-day
moving averages. Once it clears the 50-day moving average, we could be looking
at a potential rally back up to test the prior highs that were set in September.
To capitalize on this, we are looking at buying PPH today, which is the
Pharmaceutical HOLDR that loosely tracks the $DRG index.

Today’s watch list:

PPH – Pharmaceutical HOLDR

Trigger = above 73.90
(above yesterday’s high)
Target = 75.65 (resistance of the 200-day MA)

Stop = 73.10 (50% retracement of the rally)

Notes = See commentary
above for comments about the actual trade setup.

RTH – Retail HOLDR

Trigger = HALF
below 93.25, HALF below 92.78 (below yesterday’s low, then break of 20-day
Target = 90.45 (support of the 50-day MA)
Stop = 94.05 (above
yesterday’s high)

Notes = We were stalking the Retail sector for a short
yesterday, but it never triggered. However, Wal-Mart missed earnings this
morning and is already trading down in the pre-market. Since this sector has
such high expectations already priced into it, we think this event could be the
stimulus for a short-term correction in the Retail Index. Therefore, we will be
shorting half position of RTH on a break of yesterday’s low, and will short the
second half of the position on a break of the 20-day MA. Remember to watch
$IRH.X, which is the index for RTH, because it gives you a more accurate picture
of the fair value of RTH and does not have the wide spread of RTH. So, RTH is
the ETF we trade, but we watch $IRH.X to track the price of RTH.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (ETF Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG Position Sizing Model.

Closed Positions:

    ONEQ short (1/2 position from Nov. 10) –
    shorted 78.28, covered 78.40,
    points = (0.12), net P/L = ($13)

    DIA short (from Nov. 10) –

    shorted 97.75, covered 98.48, points = (0.73), net P/L = ($152)

Open Positions:



Per intraday e-mail alert, we tweaked
the stops in both ONEQ and DIA, but both hit our trailing stops yesterday when
the market reversed. This is why we often take profits on partial share size,
such as we did by covering half of the ONEQ short for a solid gain on Monday.

The RTH short did not trigger.

Edited by Deron Wagner,

MTG Founder and President